CHAPTER 1

PRESENTATION OF
FINANCIAL STATEMENTS
CHAPTER LEARNING OUTCOMES

At the end of the Chapter, the student shall be able to:

1. discuss the objective and scope of PAS 1;

2. state the objective of financial statements;
3. identify the components of the financial statements;
4. discuss the requirements of fair presentations;
5. discuss the reportorial requirements on department from compliance
with Philippine Financial Reporting Standards;
6. describe the disclosure requirements;
7. discuss the guidelines on change in accounting policies; and
8. describe the treatment of accounting errors.
 1.1 PHILIPPINE ACCOUNTING STANDARDS 1

The preparation and presentation of the financial statements are not made based
on the whims and caprices of the bookkeeper or the accountant. Rather, it is based
on set of accounting principles that are uniformly applied not only in the
Philippines, but also in global accounting arena.
In the forerunner discussions covered by the material Fundamental of
Accountancy, Business and Management 1, a preliminary discourse has been
made regarding the preparation of the financial statements. The entire discussion
focused mainly on the different steps of the accounting cycle for both the service
and merchandising business.
The first four chapters of this book, however, will introduce the learner to more
stringent requirements in the preparation of the financial statements. The
reportorial requirements of the applicable accounting Standards will be highlighted.
 Philippine Accounting Standard (PAS) 1, Presentation of Financial
Statements, outlines the provisions and requirements in preparing and
presenting the financial statements. PAS 1 applies to all businesses
notwithstanding their forms of organization and nature of operation.
The Financial Reporting Standards Council (FRSC), the successor of
Accounting Standard Council (ASC), has approved the adoption of
International Financial Reporting Standards (IFRC) 1, Presentation of
Financial Statements, issued by the International Standard Board
(IASB). As the Philippine Financial Reporting Standard (PFRC).
PAS 1 (referred to as ‘Standard ‘ in this Chapter) is effective in the
Philippines for annual periods beginning on or after January 1, 2005. it
shall be applied to all general purpose financial statements prepared and
presented in accordance with Philippine Financial Reporting Standards.
Objective of PAS 1

The objectives of PAS 1 are:

1. to prescribe the basis for presentation of general- purpose
financial statements;
2. to ensure comparability both with the entity’s financial statements
of previous periods and with the financial of other entities; and
3. to set out overall requirements for the presentation of financial
statements, guidelines for their structure and minimum
requirements for their content.
 Proper Comparability

PAS 1
Objectives

Structure & Minimum

Requirements
Figure 1. Objectives of PAS 1
PAS 1, as shown in Figure 1, basically requires structured financial statements.
The proper application of the minimum requirements of PAS1 will result to proper
presentation of financial statements . The “concept of comparability of information
within the entity and other entities will accordingly be achieved.

The term ‘structured” implies that a particular format is followed in the

preparation and presentation of the financial statements.
Scope of PAS 1
The Standard shall be applied by:

1. entities that prepare and present general purpose financial in accordance with
International Financial Reporting Standards; and
2. entities whether or not they need to prepare consolidated financial statements or
separate financial statements.

General purpose financial statements are those intended to meet the needs of users
who are not in a position to demand reports tailored to meet their particular information
needs.

The scope of PAS 1 has the following features:

a. It does not apply to special-purpose financial reports
b. It does not apply to the structure and content of condensed interim financial
c. It does not deal with recognition, measurement and disclosure of
specific transactions and other events . Those concerns are dealt with
in other Standards and Interpretations;
d. It uses terminology that is suitable for profit-oriented entities, including
public sector business entities; and
e. In the event entities with not-for-profit activities in the private sector,
public sector or government see to apply PAS 1. there may need to
amend the descriptions used for particular line items in the financial
statements for the financial statement themselves.

These requirements will help attain the objectives of proper presentation

and comparability of information in the financial statements.
 1.2 FINANCIAL STATEMENTS
Financial statements are structured representation of the financial position, financial
performance and cash flows of an entity. It also includes the notes which contain
additional information like definition of the item, measurement or valuation procedures
and disclosures requirements.
In this material, however, the preparation of the notes to the financial statements will
not be included in the discussion. The preparation of noes to the financial statements is
deeply discussed in collegiate accounting subjects.
Purpose of Financial Statements
The basic objective of general purpose financial statements communication, that is,
to promote information about the following:
1. Financial position;
2. Financial performance;
3. Cash flows; and
4. Management stewardship of resources.
 The information provided in the financial , along with other information in the
notes , assists users in predicting the entity’s future cash flows and, in particular,
their timing and certainty.

The process of predicting the earning potentials and financial capabilities of an

entity is made through the analysis of the different information contained on the
financial statements. The analysis of information contained in the financial
statements is lengthily discussed in Unit Two of this book.

Components of Financial Statements

The financial statements are considered the final product of the whole
accounting process. The author has lengthily discussed the complete
accounting process in Accountancy, Business and Management 1.
A complete set of financial statements comprises the following:

1. Statement of financial position;

2. Statement of comprehensive income;
3. Statement of changes in equity;
4. Statement of cash flow; and
5. Notes, comprising a summary of significant accounting policies and other
explanatory notes.
The following reports and statements are outside the meaning of the general purpose financial
statements described above and therefore outside the scope of the Philippine Financial
Reporting Standards:

1. financial review by management that describes and explains the main features of
the entity’s financial performance, financial position and the principal uncertainties
it faces.
2. environmental reports and value added statements, particularly in industries in
which environmental factors are significant; and
3. Reports and statements when employees are regarded as an important user
group.
 1.3 FAIR DISTRIBUTION

The Standard requires that financial statements shall present fairly the
financial position, financial performance and cash flow of an entity. It does not
require true financial statements.
financial statement are fairly presented when they include all necessary
information that will influence the decision of economic users. In other words,
the financial statements are still considered fairly presented even some
information are not included therein and the decisions of the users are not
influences by such exclusion.
for example, JENNY Merchandising failed to include in it’s the inventory
the goods in transit amounting to 50,000. The exclusion of the merchandise
in the financial statements does not, however, materially affect and influence
the decision of the users. In this case, the financial statements of JENN
Merchandising, though not considered true, are still fairly presented.
Basic features of Fair Presentation

The following are the salient features of the fair presentation requirements:
1. Fair presentation requires the faithful representation of the effects of
transactions, other events and conditions in accordance with the definition
and recognition criteria for assets, liabilities, income and expenses.
2. An application of the Philippine Financial Reporting Standards with
additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation.
3. An entity whose financial statements comply with the PRFSs shall make
an explicit and unreserved statement of such compliance in the notes.
4. Financial statements shall not be described as complying with PRFSs
unless they comply with all the requirements of PRFSs.
Indicators of Compliance with Fair Presentation
The following are the indicators of compliance with fair presentation requirements
of financial statements:
1. An entity applies all applicable Philippine Financial Standards.
2. An entity selects and applies accounting policies in accordance with PAS No.
8, Accounting policies, Changes in Accounting Estimates and Errors.
3. An entity presents an information , including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information.
4. An entity provides additional disclosures when compliance with the specific
requirements in PRFSs is insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the entity’s
financial position and financial performance.

Inappropriate accounting policies are not rectified either by disclosure of the

accounting policies or by notes or explanatory materials.
 1.4 DEPARTURE FROM COMPLIANCE WITH PRFSs

The business shall perform the following procedures in case the management
concludes that compliance with a requirement in PRFSs would be misleading that it
would conflict the objective of financial statements set out in the Framework.
1. Depart from that requirement if the relevant regulatory framework requires does
not prohibit such departure; or
2. Reduce the misleading aspects of compliance if the relevant regulatory framework
prohibit departures.

Query: What indicates conflict between compliance requirements of PRFSs and the
objective of financial statements?
Answer: An item of information would conflict with the objective of financial
statements when it does not represent faithfully the transactions, other events
and conditions that it either purports to represent or could reasonably be expected to
represent or could reasonably be expected to represent and, consequently, it would
be likely to influence economic decisions made by users of financial statements.
Framework Does not Prohibit Departure

When an entity departs from the requirements of the Standards because compliance
with the Standard would be in conflict with the objective of financial statements, and the
regulatory framework does not prohibit departure, the entity shall disclose in the notes:
a. That management has concluded that the financial statements present fairly the
entity’s financial position, financial performance and cash flows;
b. That it has complied with applicable Standards and the Interpretations, except that it
has departed from a particular requirement to achieve a fair presentation;
c. The title of the Standard or Interpretations from which the entity has departed, the
nature of the departure, including the treatment that the Standard or Interpretation
would require, the reason why that treatment would be misleading in the
circumstances that it would conflict with the objective of financial statements set out
in the Framework, and the treatment adopted; and
d. For each period presented, the financial impact of the departure on each item in the
financial statements that would have been reported in complying with the requirement.
Framework Prohibit Departure

When an entity departs from a requirement of a Standard because

compliance of a requirement would result to conflict to the objective of financial
statements, and the regulatory framework prohibits departure, the
management shall reduce the perceived misleading aspects of compliance by
disclosing the following:
a. The title of the Standard in questions, the nature of the requirement, and
the reason why management has concluded that complying with the
requirements is so misleading that it conflicts with the objectives of the
financial statements; and
b. The adjustments to each item in the financial statements that management
has concluded would be necessary to achieve far fair presentation.
Management Consideration
When assessing whether complying with a specific requirement in a Standard or
an Interpretation would be so misleading that it would conflict with the objective of
financial statements set out in the Framework considers:
a. Why the objective of financial statement is not achieved in the particular
circumstances ; and
b. How the entity’s circumstances differ from those of other entities that comply with
the requirement. If other entities in similar circumstances comply with the
requirement, there is a rebuttable presumption that the entity’s compliance with the
requirement would not be so misleading that it would conflict with the objective of
financial statements set out in the Framework.

EXERCISES
1. Discuss the concept of fair presentation.
2. What are the indicators that the business has complied with fair presentation?
3. What should be disclosed in case an entity from compliance with Philippine
Financial Reporting Standards (PRFSs)?
 1.5 GOING CONCERN AND ACCRUAL BASIS

Going concern
The going concern assumption dictates that the business shall continue to
operate indefinitely unless otherwise proven to be otherwise. Hence, the financial
statement shall be prepared on a going concern basis unless management either
intends to liquidate the entity or cease trading, or has no realistic alternative but to
do so.
The following guideline should be observed in the preparation and presentation
of financial statements relative to going concern assumption:
1. The management shall make an assessment of an entity’s ability to continue as
a going concern.
2. When management is aware, in making its assessment, of material uncertainties
related to events or conditions that may cast significant doubt upon the entity’s
ability to continue as a going concern, those uncertainties shall be disclosed.
3. When financial statements are not prepared on a going concern basis, that
fact shall be disclosed, together with the basis on which the financial
statements are prepared and the reason why the entity is not regarded as a
going concern.
4. The management shall take into account all available information about the
future in assessing whether the going concern assumption is appropriate.
5. When an entity has a history of profitable operation and ready access to
financial resources in times of need, a conclusion that the going concern
basis of accounting is appropriate without a detailed analysis;
6. The management before it can satisfy itself that the going concern is
appropriate, in other cases, should consider the following wide range of
factors relating to:
a. Current and expected profitability;
b. Debt repayment schedules; and
c. Potential sources of replacement financing
Accrual Basis
An entity shall prepare it’s financial statements, except for cash flow
information, using the accrual basis accounting.

Under this basis, the effects of transactions and other events are
recognized when they occur and not as cash is received or paid and they are
recorded in the accounting records and reported in the financial statements of the
periods to which they relate.

financial statements prepared on the accrual basis inform users not

only of past transactions involving the payment and receipt of cash but also of
obligations to pay cash in the future and of resources that represent cash to be
received in the future.

financial statements prepared on the accrual basis provide the type of

information about past transactions and other events that is most useful to users
making economic decisions.
 1.6 CONSISTENCY OF PRESENTATION
The principles of consistency strongly requires that the presentation and
classification of items in the financial statements shall be retained from one period to
the next. In other words, what is the classification and presentation of the items on
the face of the financial statement last year shall be applied in the current year.
An entry , however, is not precluded from changing the presentation and
classification of information on the face of the financial statements subject to some
terms and conditions.

Instances to Change Statement Presentation

The business may abandon the principle of consistency when:
a. it is apparent, following a significant change in the nature of the entity’s
operations or a review of its financial statements, that another presentation
or classification would be more appropriate having regard to the criteria for
the selection and application of accounting policies; or
b. A Standard or an Interpretation requires a change In presentation.
Conditions for Change in Presentation

Under the following conditions, a business may affect changes in the

presentation of its financial statements:

a. The change presentation provides information that is reliable and is

more relevant to users of the financial statements; and,
b. The revised structure is likely to continue, so that comparability is not
impaired.

When making such changes in presentation, an entity reclassifies its

comparative information. For example, an entity that changes its financial
statements presentation for the period ending 2018 must reclassify the
2017 financial statements in order attain consistency of presentation.
 1.7 MATERIALITY AND AGGREGATION
Materiality is a constraint in presenting information on the financial
statements. The concept of accounting constraints has been discussed
lengthily in Part 1 of this specialized field. The item is considered material
when its presence or absence in the financial statements will influence the
decision of the users.

PAS 1, Presentation of Financial Statements has underlined the following

guidelines on materiality and aggregation.
1. Omission or misstatement of items are material if they could, individually or
collectively, influence the economic decision of users taken on the basis of
financial statements.
2. Materiality depends on the size and nature of the omission or misstatement
judged in the surrounding circumstances. The size of nature of the item, or
a combination of both, could be the determining factor.
3. Each material class of similar items shall be presented separately in the
financial statements. Items of a dissimilar nature of function shall be presented
separately unless they are immaterial.
4. If a line item is not individually material, it is aggregated with other items either
on the face of the financial statements or in the notes.
5. An item that is not sufficiently material to warrant separate presentation on the
face of the financial statements may nevertheless be sufficiently material for it
to be presented separately in the note
6. The specific disclosure requirement in a Standard need not to be satisfied if
the information is not material.

EXERCISES
1. Discuss the following accounting principles
a. Going concern; and
b. Accrual
2. When is the principle of consistency abandoned?
3. Described the concept of materiality and aggregation
 1.8 OFFSETTING

Offsetting simply refers to the process of deducting the balance of one account
from another related account. For example, the matured notes payable of a
customer may be deducted form the cash deposit of such customer.
It is important that assets and liabilities, and income and expenses, are reported
separately. They shall not be offset unless required or permitted by a Standard.
For example, overpayment of a debtor should not be offset with receivable.
Offsetting in the statement of comprehensive income and in the statement of the
financial condition, except when offsetting reflects the substance of the transaction
or other event, detracts from the ability of users both to understand the
transactions, other events and condition that have occurred and to assess the
entity’s future cash flows
The concept of offsetting does not refer to measuring assets net of valuation
allowances, as in the process of deducting obsolescence allowance or inventories
or doubtful account on receivables.
 1.9 COMPARATIVE INFORMATION
The information provided on the face of the financial statements will provide greater value
to the users if it possesses the element of comparability

The basic objective of comparability is to assist users of financial statements in making

economic decision by allowing trends in the assessment of trends in financial information for
predictive purposes.

In applying the concept of comparability of information, the following requirements should

be observed:
1. Comparison shall be included for narrative and descriptive information when it is relevant
to an understanding of the current period’s financial statements.
2. Comparative information shall be disclosed in respect of the previous period for all
amounts reported in the financial statements except when a Standard or an interpretation
permits or requires otherwise.
3. When the presentation or classification of items in the financial statements is amended,
comparative amounts shall be reclassified unless the reclassification is impracticable.
4. When comparative amounts are reclassified, an entity shall
disclose:
a. The nature of the reclassification
b. The amount of each item or class of items that are reclassified;
and
c. The reason for the reclassification
5. What is impracticable to reclassify comparative amounts, an entity
shall disclose:
a. The reason for not reclassifying the amounts ; and
b. The nature of the adjustments that would have been made if
the amounts had been reclassified.
 1.10 REPORTING PERIOD
Financial statements shall be presented at least annually
when the date of an entity’s statement of financial position changes and
the annual financial statements are presented for a period longer or shorter
than one year, an entity shall disclose, in addition to the period covered by
the financial statements. The following:

a. The reason for using a longer or shorter period; and

b. The fact that comparative amounts for the income statement, statement of
changes in equity, cash flow statement and related notes are not entirely
comparable.
 1.11 ACCOUNTING PERIOD
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements. The
accounting policies adopted by the business in the preparation and presentation of
items in the financial statement need to be disclosed.
Disclosure of Accounting Policies
Philippine Accounting Standard (PAS) 8, Accounting Policies, Changes in Accounting
Estimates and Errors, prescribes the criteria for selecting and changing accounting
policies, together with the accounting treatment and disclosure of changes in accounting
estimates and correction of errors.

PAS 8 is intended to enhance the relevance and reliability of an entity’s

Financial statements, and the comparability of those financial statements over time and
with the financial statements of other entities.

Disclosure requirements for accounting policies, except those for changes in

accounting policies, are set out in PAS 1, Presentation of Financial Statements.
An entity shall disclose in the summary of significant accounting policies:

1. the measurement basis or (bases)used in preparing the financial statements; and

2. the other accounting policies used that are relevant to an understanding of the financial
statements

It is important for the users to be informed of the measurements basis or bases used
in the financial statement, because the basis on which the financial statements are
preferred significantly affect their analysis. The measurements bases are historical
cost, current cost, net realizable value and fair or recoverable value. The widely used
measurements basis is historical cost.

When more than one measurements basis is used in the financial statement, for
example, when particular classes of assets are revalued, it is sufficient to provide an
indication of the categories of assets and liabilities to which each measurements basis
is applied. In deciding whether a particular accounting policy should be disclosed,
management considers whether disclosure would assist users in understanding how
transactions, other events and condition are reflected in the reporting financial
performance and financial position.
Disclosure of particular accounting policies is especially useful to users when those
policies are selected from alternatives allowed in the Standard and Interpretation.
Each entity considers the nature of its operation and the policies that the users of
each financial statements would expect to be disclosed for that type of entity. For
example, an entity to income taxes would be expected to disclose its accounting
policies for income taxes, including those applicable to deferred tax liabilities and
asset.

When an entity has significant foreign operations or recognition of foreign exchange

gains and losses would be expected. When business combination have occurred the
policies used for measurements of good will and minority interest are disclosed.

An accounting policies may be significant because of the nature of the entity’s

operation even if amount for current are prior periods are not material.

An entity shall disclose, in the summary of significant accounting policies or

other notes, the judgements, apart from those involving estimation
management has made in the process of applying the entity’s accounting
policies that have the most significant events on the amount recognized in the
financial statements.
Selection and Application of Accounting Policies

When a Standard or an Interpretation specifically applies to a transaction,

other events or condition, the accounting policy or policies applied to that
item shall be determined by applying the Standard or Interpretation and
considering any relevant Implementation Guidance issued by the Financial
Reporting Standard Council (FRSC)

In the absence of a Standard or an Interpretation that specifically applies

to a transaction, other event or condition, management shall use its
judgement and developing and applying an accounting policy that results in
information that is relevant and reliable.
Factors to Consider in the Absence of a Standard
The management shall consider the following guidelines in applying its
judgement in developing an accounting policy in the absence of specific
Standard.

1. Adopt the accounting policy that results in information that is relevant to the
economic decision-making needs users.
2. Apply the accounting policy that results in reliable financial statement.
Financial statement are reliable when they:

a. represent faithfully the financial position, financial performance, and cash

flows of the entity;
b. reflect the economic substance of transaction, other events and
conditions, and not merely the legal form; c. are neutral, i.e. free from
bias;
c. are prudent; and
d. are complete in all materials respects.
3. Refer to, and consider the applicability of the following sources:
a. the requirements and guidance in Standard and Interpretation dealing with
similar and related issues; and
b. the definition, recognition criteria and measurement concepts of assets,
liabilities, income, and expenses in the Framework.

4. Consider the most recent pronouncement of other standard-setting bodies that

use a similar conceptual framework to develop accounting standards, other
accounting literature and accepted industry practices, to the extend that these do
not conflict with the sources in Philippine Financial Reporting Standards.

Consistency of Accounting Policies

An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless a Standard or an Interpretation
specifically requires or permits categorization of item for which different policies may be
appropriate.

If a Standard or an Interpretation requires or permits such categorization, an appropriate

accounting policy shall be selected and applied consistently to each category.
Changes in Accounting Policies
An entity shall change accounting policy only if they change

a. is required by a Standard or an Interpretation; or

b. results in the financial statements providing reliable information about the effects
of transactions, other events or conditions on the entity’s financial position,
financial performance and cash flows.

Users of financial statements need to be able to compare the financial statements of

an entity over time to identify trends in its financial position, financial performance
and cash flows.

The following are not changes in accounting policies:

1. The application of an accounting policy for transactions, other events or

conditions that differ in substance from those previously occurring; and
2. The application of a new accounting policy for transactions, other events or
conditions that did not occur previously or were immaterial.
Application of Changes in Accounting Policies
The following guidelines shall be observed when an entity changes its accounting
policies:
1. An entity shall account for a change in accounting policy resulting from initial
application of a Standard in accordance with specific transitional provision, if any
in that Standard.
2.  An entity that changes an accounting policy upon initial application of a
Standard that does not include specific transitional provision applying to that
change, or changes an accounting policy voluntarily, it shall apply the change
retrospectively.

In other words, change in accounting policies should be handled retroactively.

Retrospective application means applying a new accounting policy to transaction as
if the policy had always been applied.

3. When a change in accounting policy is applied retrospectively, the entity shall

adjust the opening balance of each affected component equity for the earliest
prior period presented and the other comparative amounts disclosed for each
prior period presented as if the new accounting policy has always been applied.
Limitation on Retrospective Application

Change in accounting policies should be handled retrospectively except:

1. when it is impracticable to determine the period-specific effect on comparative

information for one or more prior periods presented; or  

2. when it is impracticable to determine the cumulative effect at the beginning of

the current period to all prior periods.
 
When it is impracticable to determine the period-specific of changing an
accounting policy on comparative information for one or more prior periods
presented, the entity shall apply the new accounting policy to the carrying amounts
of assets and liabilities as at the beginning of the earliest period for which
retrospective application is practicable, which may be the current period and shall
make a corresponding adjustment to the opening balance of each affected
component of equity for the period.
In a corporate entity, the adjustment is usually made to retained earnings.
However, the adjustment may be made to another component of equity. When it
is impracticable to determine the cumulative effect, at the beginning of the
current period, of applying a new accounting policy to all prior periods, the entity
shall adjust the comparative information to apply the new accounting policy
prospectively from the earliest data practicable.

Applying a requirement is impracticable when the entity cannot apply if after

making reasonable effort to do so.

EXERCISES
1. What is meant by the principle of offsetting?
2. What are disclosed when comparative amounts are reclassified?
3. What is meant by accounting policy?
4. State to factors to consider in the absence of a Standard.
5. When shall an entity change its accounting policy?
6. How are changes is accounting policy handled? Discuss.
7. Give the limitations of retrospective application.
 1.12 ACCOUNTING ESTIMATES
A change in accounting estimate is an adjustment of the of the carrying amounts
of an asset or liability, or the amount of periodic consumption of an asset, that
result from the assessment of the present status of and expected future benefits
and obligations associated with assets and liabilities.

Change in accounting estimates results from new information or new

development and, accordingly not correction of errors. By its nature, revision of
an estimate does not relate to prior periods.

Estimation involves judgement based on the latest available, reliable

information. For example, estimates may be required on the determination of the
following:
a. bad debts;
b. inventory obsolescence;
c. fair value of financial assets or financial liabilities;
d. useful lives or depreciable assets; and
e. warranty obligations.
Treatment of Change in Accounting Estimates
The effect of a change in accounting period shall be recognized prospectively
by including it in profit or loss in.
a. The period of the change, if the change affect that period only; or
b. The period of the change and the future period, if the change affects both

Prospective application means recognizing the effect of the change in the

accounting estimate in the current and the future period affected by the change.

For example, change in the estimate of the amount of the bad debts affect only
the current period’s profit or loss and therefore is recognized in the current period.
However, a change in the estimated life of depreciable assets affects depreciation
expense for the current period and for each future period during the assets
remaining useful life.

In both cases, the effect of the change relating to the current period is
recognized as income or expense in the current period. The effect, if any, on future
period is recognized as income or expense in those future periods.
Disclosure of Change in Accounting Estimates

An entity shall disclosed the nature and amount of a change in

an accounting estimate that has an effect in the current period or
expected to have an effect in future periods, except for the
disclosure of the effect on future period when it is impracticable to
estimate that effect.

If the amount of file effect in future periods is not disclosed

because estimating it is impracticable, an entity shall disclose that
fact.
 1.13 ACCOUNTING ERRORS
Accounting errors include the effect of mathematical mistakes, mistakes in applying
accounting policies oversights or misinterpretations of facts or fraud.
Prior period errors are omissions from, and misstatement in the entity’s financial
statements for one or more prior periods arising from a failure to use or misuse of reliable
information that.

a. Was available when financial statements for those period where authorized for
issue and
b. Could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those financial statements.

Accounting errors can arise in respect of the recognition, measure and

presentation or disclosure of elements of financial statements.

Financial statements do not comply with Philippine Financial Reporting Standard (PFRSs)
If they contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity’s financial position , financial performance or cash flows.
Treatment of Errors

An entity shall correct mater4ial prior errors retrospectively in the first set
of financial statements authorized for issued after their discovery by:

a. restating the comparative amount for the prior period(s)presented in

which error occurred or

b. if the error occurred before the earliest prior period presented , restating
the opening balances of assets, liabilities and equity for the earliest prior
presented.
 
In other words, error should be handled retroactively or retrospective,
Retrospective restatement is correcting the recognition, measurement and
disclosure of amounts of elements of financial statements as if a prior
period error had never occurred.
Limitation of Retrospective Restatement

A prior period error shall be corrected by retrospective restatement except

a. when it is impracticable to determine the period –specific effect or

b. When it is impracticable to determine the cumulative effect of the error.

 
The correction of a prior period error is excluded from profit or loss for the
period in which the error is discovered. Any information presented about prior
period, including any historical summaries of financial data, is restated as far
back as is practicable.

When it is impracticable to determine the amount of an error for all prior

periods, the entity restates the comparative information prospectively from the
earliest date practicable.
Disclosure of Prior Period Errors

An entity shall disclose the following:

1. The nature of prior period errors.

2. The amount of the correction for each prior period presented.
3. Each financial statement line item affected.
4. Basic and diluted earnings per share if applicable.
5. the amount of correction at the beginning of the earlier prior period
presented, and
6. Of retrospective restatement is impracticable for a particular prior period,
the circumstances that led to the existence of that condition and a
description of how and from when the error has been corrected.
 
Financial statements of subsequent periods need not repeat these
disclosures.
Impracticability of Retrospective Restatement of Prior Period Errors
The following instances may indicate the impracticability to adjust comparative
information for one or more prior periods to achieve comparability with the current period.
a. The data may not have been collected in prior periods in a way that allows either
retrospective application of a new accounting policy or retrospective restatement
to correct prior period.
b. The entity makes estimates in applying an accounting policy to elements of
financial statements recognized or disclosed in respect of transactions, other
events or conditions.

In order, therefore to apply retrospectively a new accounting policy or correct a prior

period error, it is required that the information.
c. provides evidence of circumstances that existed on the date at which the
transaction, other events or conditions occurred and
d. would have been available when the financial statements for that prior period
where authorized for issue.
EXERCISES
1. What is meant by accounting errors?
2. How are accounting errors handled?
 CHAPTER REVIEW 1
1.1- TRUE OR FALSE
Write true if the statement is correct .If you believe otherwise, write false and state
you reason briefly.

1. To correct the prior period error, an entity should make retrospective restatement of
its financial statement though it would be impracticable to determine the cumulative
effect of the error.
2. An entity may depart from the requirements of a specific Standard in any instance of
compliance would be in conflict with the objective of financial statements resulting to
the misleading financial statements.
3. Philippine Accounting Standard 1 provides guidelines for the proper presentation of
general-purpose financial statements in order to provide desired information to
specific user.
4. The fair presentation requirement of the Standard implies that the financial
statements are absolutely correct in presenting the monetary values of the different
accounting elements.
5. An entity that applies the requirements of the Standards are presumed to have
achieved fair presentation.
6. When compliance with the requirements of PFRS becomes
misleading and in conflict with the objectives of financial statements
the management should exclude in the information.

7. An entity may change the presentation of its financial statements

when it fees the necessity of adopting a change.

8. Prior period errors are handled currently and retrospectively, unless it

is impracticable to do otherwise

9. When the cumulative effect of the prior period error becomes

impracticable to determine, the management does not have to make
retrospective restatement.

10. In case there is no applicable Standard that governs the presentation

of certain event the management shall adopt a policy that will provide
relevant and reliable information.
1.2- TRUE OR FALSE
Write true if the statement is correct .If you believe otherwise, write false and state you reason
briefly.

1. The application of accounting policies on events that differ in substance from previous
events is a change in accounting policies.
2. Change in accounting policy should be handled currently and prospectively.
3. The entity shall restate the beginning balance of each component of equity and other
comparative amount if there is a change in accounting policy.
4. Change in accounting policies is synonymous with change in accounting estimates.
5. Consistency of accounting policies mandates that policies shall be consistency applied on
similar transactions unless a Standard allows different applicable and appropriate policies.
6. Philippine Accounting Standard (PAS) 1 outlines the presentation of financial statements
valuation procedures of the various accounting elements and disclosure of related party
transactions.
7. The provisions and requirements set in PAS 1 are intended to apply to special purpose
financial reports like income tax computations and general-purpose financial statements.
8. The reason for not reclassifying shall not be indicated in the notes since disclosure has
been made already of the nature of the adjustment if the amounts had been reclassified.
9. Financial statements shall be presented at least twice a year.
10. The reporting period may be less but not more than one year.
1.3- TRUE OR FALSE
Write true if the statement is correct. If you believe otherwise, write false and state you reason briefly.
1. Once an entity complex with the requirements of PFRs. There is no need to make an explicit and
unreserved statement of the compliance in the notes.
2. The concept of compliance means compliance with PFRS requirements on presentation and
valuation except disclosure.
3. Financial statement are unstructured representation of the financial position, financial
performance and cash flows of an entity.
4. The management shall adopt a policy that will provide relevant and reliable information in case
there is no specific Standard that is applicable to such event or transaction.
5. There is a need to amend the description used in a particular line item in its financial statement s
when non-profit entities will apply PAS 1.
6. Comparative amounts may not be reclassified in the financial statements if the presentation of
items has been amended.
7. Fair presentation implies faithful representation of assets, liabilities, income and expenses not
with-standing the principle of materiality and cost effectiveness.
8. It is safe to assume that financial statements presented in accordance with the requirements of
the Philippine Financial Reporting Standards (PFRSs) are fairly presented.
9. When an entity presents financial information including its policies in a manner that provides
relevant, reliable, comparable and understandable information is an indication that it is complying
with PFRSs requirements.
10. Fair presentation of financial statements requires compliance with PFRSs and disclosure
requirements, having the qualitative characteristics and providing explanatory notes.
1.4- TRUE OR FALSE
Write true if the statement is correct. If you believe otherwise, write false and state you reason briefly.

1. The needs of the economic decision makers should be given foremost consideration in departing from
specific requirements in the Standard.
2. Financial statements shall be prepared on the basis of going concern notwithstanding the intention of
the management to liquidate the entity.
3. The reason why the entity is not considered as a going concern in the preparation of the financial
statement does not have to be disclosed provided the basis of preparation has been clearly indicated
in the notes.
4. Assets and liabilities and income and expenses may be offset if the management believes it otherwise.
5. The principle of consistency requires that items in the financial statements shall be retained from one
period to the next notwithstanding the objective of the financial statements.
6. The principle of consistency presentation should be abandoned when there is a material change in the
nature of entity‘s operation.
7. An entity is allowed to abandon the principle of consistency in presentation when changed
presentation will provide reliable and more relevant information to users.
8. When an entity departed from the requirements of PFRSs, it has to disclose that it has complied with
applicable Standards except that it has departed from a particular requirement to achieve a fair
presentation.
9. A business entity may depart from the PFRSs, provided it presents financial statements that will
answer the specific needs of certain user.
10. An item that did not represent faithfully the transaction would be a conflict with the objective of financial
statements.
1.5- TRUE OR FALSE

Write true if the statement is correct. If you believe otherwise, write false and state you reason
briefly.
1. When an entity made changes in the presentation, it may not reclassify its comparative
information since the changes is made currently and will be handled prospectively.
2. Omissions of items are considered material if they could collectively but not
individually influence the economic decision of users.
3. The Standard requires that if a line item is not individually material, it should be
aggregated with other items in the financial statements.
4. All the financial statements shall be prepared using the accrual basis of accounting.
5. Under the accrual basis of accounting transactions and events are recognized as cash
is received or paid.
6. Inappropriate accounting policies are corrected by means of disclosure in the notes or
explanatory materials.
7. Departure from compliance with the certain requirement of PFRs is strictly prohibited.
8. The amount of omission is P 1,000,000 is considered material.
9. The materiality of an item depends solely on the size item.
10. Under the principle of materiality, each material class of similar items shall be
aggregated in the financial statements.
 1.6- TRUE OR FALSE
1. Philippine Accounting Standard 1 sets out the criteria for selecting and changing accounting policies and
the proper accounting treatment and disclosure.
2. Accounting policies are broad rules and practices applied by an entity in handling financial transactions
and determining appropriate sources of funds.
3. The entity shall omit events or transactions from its financial statements when there is no Standard
applicable to such item or transactions.
4. The general purpose of the financial statements is to communicate to interested users the financial
position and financial position and financial performance of a business.
5. The guidelines set out in PAS 1 will include financial review by the management explaining the main
features of the financial position and financial performance of the business.
6. The statement of financial position and financial position provides information about the entities assets,
liabilities, gains and equity.
7. The entity shall make a proper disclosure if it is impractical to reclassify comparative amounts.
8. One of the objectives of PAS 1 is to prescribe the measurement basis for the different items contained
in the general –purpose financial statements.
9. PAS 1 also prescribes the guidelines for the structure of financial statements and the maximum
requirements for their content.
10. PAS 1 applies to all entities that prepare and present financial statements in accordance with the
International Financial Reporting Standards except those business entities that are provided
preferences in reporting.
1.7- TRUE OR FALSE

Write true if the statement is correct. If you believe otherwise, write false and
state you reason briefly.
1. An entity that changes the basis of measurement should handle and
treat this as change in accounting estimates.
2. When an entity finds it difficult to treat the change whether change in
accounting estimates or change in accounting policies, the change is
treated as change in policy.
3. Change in accounting estimates is handled retrospectively.
4. Accounting errors are due to misinterpretation of facts of fraud that
results to mathematical mistakes in applying accounting estimates.
5. Accounting errors are handled currently and prospectively.
6. Change in accounting policy is not permissible.
7. General-purpose financial statements are intended and usually tailored to
meet their specific needs of users.
8. PAS 1 also applies o the structure and content of condense in term financial
statements.
9. The terminologies used in PAS 1 are suited non-profit organizations and
government agencies.
10. Non-profit organizations are prohibited to apply the requirements of PAS 1 in
the presentation the financial statements.
 
1.1- MULTIPLE CHOICE
Select the best answer.
1. The following statements are correct except:
a. A prior error shall be corrected by retrospective restatement of the financial statements
except when it is practicable to determine the period specific effect.
b. A prior period error shall be corrected by retrospective restatement of the financial
statements except when it is impracticable to determine the period specific effect.
c. A prior period error shall be corrected by retrospective restatement of the financial
statements except when it is impracticable to determine the cumulative effect of the
error.
d. The correction of a prior period error is excluded from profit or loss for the period in
which the error is discovered.

2.These are omissions from or misstatement in the entity’s financial statements for one or
more prior periods arising from failure to use reliable information that was available when
financial statements for those period where authorized to issue.
a. Accounting estimates c. Change in accounting policy
b. Prior period errors d. Reconciling items

3. The use of estimates may be required on the determination of the following, except
a. inventory obsolescence c. amount of cash in bank
4. The following statements are correct, except
a. A change in the measurement basis is considered a change in accounting policy
b. A change in the measurement basis is considered a change in accounting estimates.
c. The change is treated as a change in accounting estimates when it is difficult to distinguish a
change in accounting policy from accounting estimates.
d. A change in accounting estimates shall be handled prospectively.

5. Statement 1. Financial statements do not comply with PFRSs requirements if they contain immaterial
errors made intentionally to achieve a particularly presentation.
Statement 2. The affect of change in accounting estimates shall be included in the determination of
profit or less in the period of change and future if the changes affect both
a. Only the first statement is correct. C. Both statements are correct
b. Only the second statement is correct D. Neither statement is correct

6. STATEMENT 1. Change in accounting policy should handled retrospectively except It is practicable to

determine the period -specific effect on comparative Information for one or more
period presented.
STATEMENT 2. Change in accounting policy should handles retrospectively, except: When it is
practicable to determine the cumulative effect at the beginning of the current period to
all periods.
c. Only the first statement is correct. C. Both statement are correct.
d. Only the second statement is correct. D. Neither statement is correct .
7. Which of the following is not considered an objective of financial statement?
a. To enhance the credibility of information in order to meet the needs of
the users
b. To provide information about the financial position of an entity
c. To present the sources and applications of cash during a certain period
d. To provide information about managements utilization of resources

8. The ff. Statement express the features of fair presentation, except:

e. Unless the financial statement fully comply with all the requirements of
PFRS’s, they shall not be described as compliant.
f. An entity whose financial statements fully comply with all requirements
of PFRS’s need not make an explicit statement of such compliance.
g. Applying all the requirements of PFRS’s with proper disclosure is
presumed to have financial statements fairly presented.
h. Faithful representation of all transactions and events affected all the
accounting elements is necessary in the attainment of fair presentation.
9. The ff. Statements indicate compliance with the requirements of fair presentation, except:
a. The entity applies all the requirements of applicable PFRS’s
b. The entity presents information that will provide relevant, reliable, comparable and
understandable financial statements.
c. The entity provides additional disclosure when specific requirement in PFRS is
insufficient to enable users to understand the impact of certain transactions.
d. The entity applies all the requirements of PFRS in order to meet the specific needs of
external users.

10. STATEMENT 1. When complying with a specific requirement in PFRS would be

misleading and would be in conflict with the objective of financial
statements, may depart from the requirement
STATEMENT 2. An entity may correct inappropriate accounting policies through proper
disclosure of the policy or by explanatory remarks.
a. Only the first statement is correct c. Both statements are correct.
b. Only the second statement is correct d. Neither statement is correct.
1.2- MULTIPLE CHOICE
1. Philippine Accounting Standard (PAS) 1sets out the guidelines in the preparation and presentation
of a
a. Financial review of the management.
b. General purpose financial statement
c. Special reports and tax computation
d. Environmental reports.

2. The ff. are the objectives of PAS1, EXCEPT

e. To ensure timelines of financial statements.
f. To prescribe the basis of financial statements preparation and presentation.
g. To ensure comparability of the financial statements.
h. To set out the structure and minimum requirements of the contents of financial statements.

3. PAS 1 shall be applied by

I. Entities that present and prepare general -purpose financial statements in accordance with
information reporting Standards.
II. Entities whether or not they need to prepare consolidated financial statements
III.Entities that present and prepare special financial reports to the board of directors and
stockholders
i. I only c. I and II
j. II only d. I, II and III
4. PAS 1 does not deal on the ff. issues and requirements, except
a. Recognition of specific event and transaction
b. Measurement of obtain business transaction
c. Disclosure of transactions and events affecting the business
d. Presentation and preparation of general purpose financial statements

5. A financial statement that is not tailored to meet the specific information needs of certain user is
called___.
e. General purpose financial statement.
f. Special purpose financial statement.
g. Financial review report
h. Environmental report

6. The ff. Information are provided by a general statement, EXCEPT

i. Cash flows c. Financial marketability
j. Financial performance d. Financial performance

7. Which of the ff. Is not considered a financial statement?

k. Statement of cash flow
l. Statement of financial position
m. Statement of management representation
n. Statement changes in equity
8. The ff. Reports and statements are outside the meaning of the general -purpose financial
statement, EXCEPT
a. The statement for employees concern.
b. The financial review by management.
c. Statement of budget and performance
d. The statement of comprehensive income.
9. This financial statement provides information about the assets, liabilities and equity of a
business is
e. Statement of cash flow
f. Statement of financial position
g. Statement of financial performance
h. Statement of changes in equity
10. The result of operation of a business entity is reflected in___________.
i. Statement of cash flow
j. Statement of financial position
k. Statement of financial performance
l. Statement of changes in equity
1.3- MULTIPLE CHOICE
1. STATEMENT 1. Fair presentation requires the faithful representation of the effect of transactions in
accordance with the definition and recognition criteria of financial elements.
STATEMENT2. An application of the Philippine Financial Reporting Standards with disclosure is
presumed to result in financial statement that achieve an unfaithful is presentation
a. Only the first statement is correct. c. Both statement are correct.
b. Only the second statement is correct. d. Neither statement is correct.

2. An entity whose financial statements comply with the Philippine Financial Reporting Standards shall
c. Not make an expressed statement of such compliance in the notes.
d. Make an explicit statement of such compliance in the notes.
e. Not make an expressed statement of such compliance in the notes unless required to do otherwise.
f. Make an explicit statement of such compliance in the notes only if required to do so.

3. STATEMENT1. Financial statements shall be described ad complying party with PFRS’s unless they
comply with all the requirements of PFRS’s.
STATEMENT2. Financial statements shall be described as complying partly with PFRSs if some of
the statements are prepared in accordance with the requirements of the PFRSs.
g. Only the first statement is correct. c. Both statement are correct.
h. Only the second statement is correct. d. Neither statement is correct.
4. The ff. are indicates of compliance with fair presentation requirements of financial statement,
EXCEPT
a. Compliance to the requirements of PFRS.
b. Compliance to the requirements of disclosure
c. Possession of qualitative characteristics.
d. Possession of qualitative attributes.

5. Which of ff. statement is correct.

I. Inappropriate accounting policies are not corrected either by disclosure of the accounting policies
used or by notes or explanatory material.
II. Inappropriate accounting policies are rectified either by disclosure of the accounting policies or by
notes or explanatory material.
e. I only c. Both I and II
f. II only d. Neither I nor II

6. Which of the ff. statement is wrong?

g. In all cases, departure from compliance with Philippine Financial Reporting Standard is not
allowed.
h. In extremely rare cases, departure from compliance with Philippine Financial Reporting
Standard is allowed.
i. The title of the Standards from which the entity has departed and the nature of the departure.
j. The monetary effect of the departure requirements of the Standards.
7. The following disclosure shall be made by the management when it departed from
compliance with certain requirement of PRFS, except

a. The management conclusions that the financial statements present fairly financial
performance, financial position and cash flow of an entity.
b. The compliance with applicable Standard except that it department from certain
requirement to achieve a fair presentation
c. The title of the Standards from which the entity has departed and the nature of the
departure
d. The monetary effect of the departure requirements if the Standard

8. Which of the ff. statement is correct?

I. If other entities in similar circumstances comply with requirements of PFRSs there is
rebuttable presumption that the entity’s compliance with the requirements would not
be sol misleading.
II. If other entities in dissimilar circumstances comply with the requirements of PFRSs,
there is rebuttable that the entity’s compliance with the requirements would not be sol
misleading
A. I only C. Both I and II
B. II only D. Neither I nor II
9. Which of the ff. statement is wrong?
a. Financial statement shall be prepared on going concern basis unless
there is an intention to stop the operation.
b. When financial statements are not prepared on a going concern basis,
the fact shall not be disclosed since the items are shown on their
liquidation value.
c. The basis of preparing the financial statements and the reasons why
the entity is not regarded as a going concern shall disclosed.
d. The management shall make an assessment of the entity’s ability to
continue as a going concern when preparing the financial statements.

10. The financial statement shall be prepared using the accrual basis of
accounting, except
e. The statement of financial position
f. The statement of comprehensive income
g. The statement of cash flow
h. The statement of changes in equity.
1.6- MULTIPLE CHOICE
1. STATEMENT 1. Entity shall select and apply its accounting policies consistently for
similar transactions unless a Standard specifically requires
categorization of items for which different policies may be appropriate.
STATEMENT2. If a standard permits categorization, any accounting policy shall
be selected and applied inconsistently to each category.
A.Only the first statement is correct.
B.Only the second statement is correct.
C.Both statements are correct.
D.Neither statement is correct.
2. An entity shall change its accounting policy if the change
I. Result to reliable and relevant financial statement on the entity’s financial position
financial performance and cash flows.
II. Is required by a standard or an interpretation
III. Is approved by the policy making body of the entity.
a. I and II c. I and II
b. I and III d. II and III
3. STATEMENT1. The application of an accounting policy for transactions or events that differ in
substance from those previously occurring is not considered a change in
accounting policy.
STATEMENT2. The application of a new accounting policy for transactions or events that did not
occur previously or were immaterial is not considered a change in accounting
policy
A. only the first statement is correct. C. Both statement are correct
B. only the second statement is correct. D. Neither statement are correct.
4. The change in accounting policy shall be shall handled_____________.
A. Retrospectively c. Prospectively
B. Currently and prospectively d. Either retrospectively depending on the surrounding
circumstances
5. When a change in accounting policy is applied retrospectively, the entity shall
A. Adjust the ending balance of each affected component of equity for the earliest prior period
presented and other comparative amounts disclosed for each prior period.
B. Adjust the beginning balance of each affected component of equity for the earliest prior period
presented and other comparative amount disclosed for each prior period.
C. Not adjust the ending balance of each affected component of equity for the earliest prior period
presented and other comparative amounts disclosed for each prior period.
D. Not adjust the beginning balance of each affected component of equity for the earliest prior
period presented and other comparative amount disclosed for the earliest prior period presented
and other comparative amount disclosed for each prior period .
6. The following statements are correct, except:
a. When it is impracticable to determine the cumulative effect at the beginning of the current
period to all prior periods, the change in accounting policy shall be handled currently and
prospectively
b. when it is impracticable to determine the period-specific of changing an accounting policy on
comparative information for one or more prior period, the entity shall apply the new
accounting policy to the carrying amount of assets and liabilities as at the beginning of the
earliest period for which retrospective application is practical.
c. The adjustment due to change in accounting policy is usually made to retain earnings and
to other component of equity.
d. The adjustment due to change in accounting policy is usually made to the related assets
and liabilities affected either corresponding effect to the valuation account.
7. It refers to an adjustment of the carrying amount of an asset or liability, or the amount of the
periodic consumption of an assets, that results from the assessment of the present status expected
future benefits and obligations associated with assets and liabilities.
e. accounting estimates
f. prior period errors
g. change in accounting policies
h. prior period adjustments
8. The following are examples of change in accounting estimates except:

a. determination of bad debts

b. determination of obsolete inventory
c. determination of embezzled amount
d. determination of warranty obligation
9.  The effect of change in accounting estimate is recognizes and included in the?
e. statement of financial position
f. statement of comprehensive income
g. statement of changes in equity
h. statement of cash flow
10. When it is difficult to distinguish a change in an accounting policy from a change in accounting
estimates, the change is
i. treated as a change in accounting policy
j. treated as change in accounting estimates 
k. treated either as a change in accounting policy or a change in accounting estimates depending
on  the materiality of the effect of change 
l. disregarded and no change shall be made or effected.